Overview: The IMF is planing to sell bonds for the first time in its history as part of its raising of new funds. Countries like China and Brazil, which have become important economic powers have expressed interest in buying the notes, denominated in special drawing rights (SDR) a basket of currencies used for IMF contributions. These countries also seek greater voting power in the fund.
Details of the Notes
Jul 1: The IMF's executive board approved a framework for issuing notes to member states. Interest payments will be made quarterly SDR interest rate, a weighted average of 3-month interest rates in the US dollar, euro, yen and pound sterling. The maximum maturity of five years, consistent with IMF lending under Stand-By Arrangements and Flexible Credit Line arrangements (IMF).
The IMF would issue notes when loaning funds to members. Once purchased by member governments, the notes would be tradable by the official actors, including all IMF members, their central banks, and 15 multilateral institutions—those which are designated holders of Special Drawing Rights
The IMF already has welcomed commitments from Brazil and Russia to buy $10 billion of new IMF bonds each, and from China to purchase up to $50 billion of new debt. India, Korea and Saudi Arabia have also expressed interest. (Reuters) Meanwhile the U.S. has been slow to approve its new allocation to the IMF
Prasad: For EMs, these bonds could substitute for other reserve assets, meaning buying them might have little budgetary implications, and facilitating diversity of reserve holdings - which might boost yields of US bonds. Moreover if the assets were of limited duration (12-18m), EMs could restrict the timing of their financial support to press for governance reforms. These bonds would be traded only amongst the IMF and official agencies, i.e., central banks of member countries without a secondary market for private investors to acquire or trade these instruments. The bonds are likely to be denominated in SDRs and pay an interest rate linked to the SDR interest rate (slightly higher than the treasury rate).
Other IMF Funding
At the April G-20 meeting, authorities agreed to triple the IMF funds to $750bn. So far, out of the additional $500bn agreed to be channeled to the fund, $100bn from EU, $100bn from Japan, $100bn from the US and another $25bn from Canada Switzerland and Norway were already committed ($325bn approx.). The issuance of the SDR denominated bonds are likely to channel from the BRICS additional funds to accomplish the $500bn goal. So far, the fund has since August 2008 lended approximately $50bn in SBA mainly to Pakistan, Ukraine and Hungary among other 11 countries
Leaders of G20 nations agreed to make available as much as $1.1 trillion to fight the international financial crisis, including $750bn in funding for the IMF and $250bn for trade finance. The new funding for the IMF to support poorer nations and those hardest-hit by the crisis is likely to come in part from $500bn in loans from member countries directed specially to help struggling economies. Another $250bn will be made available as the IMF essentially follows the US and UK down the route of quantitative easing by creating new special drawing rights (FT)
IMF Lending to Date
The IMF had agreed in Nov-2008 a total of $41.8b in loans, a much larger amount than the previous monthly disbursement peak of $26.6b in 2002, according to the fund’s records that date back to 1984. The largest bailout in IMF history was the September 2002 approval of $30.4b for Brazil. South Korea got $21b in December 1997, in the midst of the Asian financial crisis when Indonesia received $11.2b and Thailand got $4b
Goldman (not online) Geithner has proposed several IMF reforms, including a significant expansion of the New Arrangements to Borrow (NAB) to $500bn from $50bn today. Doing so would require Congress to enact legislation authorizing additional lending by the United States, likely $100bn. Congress seems likely to approve the request eventually but it may impose conditions. Related treasury borrowing for IMF funding wouldn't add to the reported deficit.
Brad Setser: The most that the IMF ever lent out to cash strapped emerging economies in a year was $30b, in the four quarters through September 1998 (i.e. the peak of the 97-98 crisis); The most the IMF ever lent out over two years was $40b, in the eight quarters through June 2003 (this covered crises in Argentina, Brazil, Uruguay and Turkey)
US and UK leaders have been calling on surplus regions (China and the GCC) to contribute funds. Doing so might give new impetus to the ongoing debate of reallocation of chairs and shares that would give emerging economies greater weight in the IMF which is dominated by the EU (32% of votes), the US (17%) and Japan
The reallocation of country quotas could also presumably address the large surpluses built up in countries like China. The solution to the global financial crisis problem is connected to restoring liquidity and confidence to the financial system. To do so, many say the solution must address the current imbalances which see vast sums of dollars stored-away on some sovereign balance sheets and not on others. Gordon Brown suggested that surplus-holding Gulf States, many of whom already peg their currencies to the dollar, were ready to extend money to an IMF bailout fund. Using the SDRs could help restore faith in the dollar itself. Surplus nations in many cases have no choice but to bankroll the US debt, as diversifying into non-dollar denominated assets would have drastic consequences on their own currencies (FT) Yet with capital demands at home, outflows have diminished greatly
Citi: The IMF has plenty of resources at its disposal. At end-August the IMF had total loanable funds of $253 billion, compared with current loans outstanding of $18.3 billion. This stock of loanable funds comes in two chunks. The first, US$201 billion comes from its ability to finance lending from the quotas it holds in currencies of “financially strong economies”, while an additional $52 billion could come from the IMF’s borrowing arrangements under the New Arrangements to Borrow and the General Arrangements to Borrow.
IMF Managing Director Report: Fund activities are now more focused on the policy challenges raised by the financial crisis, including strengthening contingency planning and crisis preparedness and stepping up the monitoring of highly vulnerable countries. The Fund’s immediate priorities include contributing to resolving the financial market distress and bolstering the global financial system. In collaboration with other international bodies and standard setters, the Fund is also distilling lessons from the financial crisis and encouraging early action, including through its FSAP assessments, bilateral and multilateral surveillance, and technical assistance activities
Strauss-Kahn applauded decisions by the Executive Board to propose a new and sustainable income and expenditure framework for the Fund, calling it "a landmark agreement that will put the institution on solid financial footing and modernize the IMF's structure and operations". Executive Board agreed to revamp the Fund's income model from one that primarily relies on lending to one that generates funds from various sources. At the same time, the Board considered the institution's medium-term budget for the Financial Years 2009-2011, which includes deep spending cuts, and approved the administrative budget for FY2009 (May 1, 2008-April 30, 2009). The Fund expects to close the projected income-expenditure gap of US$400 million within a few years. An endowment would be created with the profits from the limited sale of 403.3 metric tons of the Fund's gold holdings. If approved, gold sales would be conducted in a transparent manner with strong safeguards to ensure that they do not add to official sales and avoid any risk of market disruption.
David H. McCormick (undersecretary for international affairs at the US Treasury): In order to finance the $ 400 million/year gap the IMF proposed that $100 million of the gap be covered by reduction in IMF administrative expenses and the remainder through new income measures. The idea is to create an IMF endowment to generate roughly $250 million in income per year (financed through a limited gold sale). We also suggest a reduction of the IMF executive board in such a way to reduce the number of chairs in the IMF Board from 24 to 22 seats in 2010, and to 20 seats in 2012
Andrew Crockett: The Crockett Committee proposed a new income model for the Fund. The measures included expanding the Fund's investment activities, investing part of the Fund's quota resources, creating an income-generating endowment through the proceeds of a limited sale of Fund gold, resuming reimbursement of the Fund for the administrative costs of managing the program of financial assistance to low income countries and charging for the services the Fund provides to member countries
Earlier in 2008 the IMF struggled with a tough budget gap
If you are an RGE client please log in to your account.
Access to this content is restricted to RGE clients.
If you have a client code, please enter it here to activate your client account.
Click here for a free trial.
Jul 01, 2009
IMF Approves Framework for Issuing Notes to the Official Sector
Issuance of IMF Notes
Jun 11, 2009
Proposed IMF bonds won't trade like World Bank bonds - source
May 04, 2009
IMF Bonds: Details and Implications
New York Times
Apr 25, 2009
I.M.F. Planning to Sell Bonds to Finance New Loans
Apr 02, 2009
G20 nears deal on IMF funding
Nov 25, 2008
IMF Loans Total $41.8 Billion in November, ‘Busiest’ Month Ever
Oct 10, 2008
Progress Report of the Managing Director to the IMFC on the IMF’s Policy Agenda—IMF Responses to Global Economic Challenges
Council on Foreign Relations
Oct 13, 2008
Nov 05, 2008
A ‘paper-gold’ reserve system?
Oct 23, 2008
Mexico and the IMF: No strings attached; The IMF hopes a credit line for Mexico may set a trend
Feb 25, 2008
IMF Reform: Meeting the Challenges of Today’s Global Economy
Citigroup Global Markets
Oct 15, 2008
Focus on IMF: Back in business?
Nov 05, 2008
Super-sizing the IMF is wrong
Apr 08, 2008
IMF Managing Director Strauss-Kahn Applauds Executive Board's Landmark Agreement on Fund's New Income and Expenditure Framework